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16 August 2016 Asia Pacific/Japan Equity Research Engineering & Construction (Construction (Japan)) / OVERWEIGHT Comsys Holdings (1721 / 1721 JP) Rating OUTPERFORM* Price (15 Aug 16, ¥) 1,797 INITIATION Target price (¥) 2,400¹ Chg to TP (%) 33.6 Market cap. (¥ bn) 253.38 (US$ 2.51) High OP growth due to 5G base station capex, Enterprise value (¥ bn) 221.38 Number of shares (mn) 141.00 total yield of 5.5%: initiating with OUTPERFORM Free float (%) 55.0 52-week price range 1,925 - 1,372 ■ Action: We initiate coverage of Comsys Holdings with an OUTPERFORM *Stock ratings are relative to the coverage universe in each rating and a target price of ¥2,400 (potential return 33.6%). analyst's or each team's respective sector. ¹Target price is for 12 months. ■ Investment case: Our OUTPERFORM rating reflects: (1) a prospective total Research Analysts yield in FY3/18 of 5.5% (dividend yield 2.7%, return from buybacks 2.9%) Masahiro Mochizuki with attractive income growth, (2) faster projected OP growth than the rest of 81 3 4550 7389 the construction sector, and (3) scope for gross margin improvement over [email protected] the next three years due to increasing demand for base station infrastructure Yasuko Fukuda 81 3 4550 9259 related to the rollout of new, faster networks (4G and 5G). [email protected] ■ The stock is trading on a prospective P/E of 10.6x based on forecast FY3/18 earnings, at the bottom of the post-2008 range for this valuation multiple. We think the current share price reflects neither the high total yield nor the scope for future gross margin improvement. Comsys is also undervalued relative to break-up value, with a P/B of less than 1.0x based on our FY3/18 forecasts. We see it outperforming the construction sector in the future. ■ Catalysts/risks: Potential catalysts: (1) growth in orders for projects with higher margins, (2) improved gross margins, and (3) higher shareholder returns. Risks include: (1) a delay to the start of 5G services beyond 2020, resulting in failure to win 5G orders from NTT DoCoMo (9437) in FY3/18 and FY3/19, (2) labor cost inflation and (3) a fall in orders. ■ Valuation: We base our ¥2,400 target price on FY3/18E EPS of ¥171 and a prospective P/E of 14.0x (details on page 5). ■ HOLT indicates there is 26% potential upside. Share price performance Financial and valuation metrics Year 3/16A 3/17E 3/18E 3/19E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 320.7 342.7 350.4 351.6 2000 120 Operating profit (¥ bn) 23.8 25.7 27.0 28.1 1800 100 Recurring profit (¥ bn) 24.2 26.1 27.5 28.6 1600 80 Net income (¥ bn) 15.4 17.1 17.8 18.5 EPS (¥) 139.2 159.0 170.8 183.3 1400 60 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 147.9 152.2 153.0 The price relative chart measures performance against the EPS growth (%) -4.9 14.2 7.4 7.3 TOPIX which closed at 1316.63 on 15/08/16 P/E (x) 12.5 11.3 10.5 9.8 On 15/08/16 the spot exchange rate was ¥101.14/US$1 Dividend yield (%) 2.0 2.5 2.7 3.0 EV/EBITDA(x) 5.7 5.3 4.8 4.4 Performance over 1M 3M 12M P/B (x) 0.99 0.95 0.89 0.83 Absolute (%) 4.8 -5.9 5.8 ROE(%) 7.9 8.6 8.6 8.6 Relative (%) 4.9 -4.5 26.7 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 16 August 2016 Table of contents Initiating at OUTPERFORM 3 Sustainably high returns make stock attractive 3 Share price performance 4 Target price and valuation 5 Reliable performance 6 Subsidiaries and business segments 7 Detailed earnings forecasts 10 Expecting OP growth to continue 10 Demand assumptions for NTT engineering segment 11 Expecting sales booked on orders in same or following fiscal year 14 Risks 15 Shareholder returns 15 Forecasts and valuation 17 HOLT analysis 21 Comsys Holdings (1721 / 1721 JP) 2 16 August 2016 Initiating at OUTPERFORM Sustainably high returns make stock attractive We initiate coverage with an OUTPERFORM rating and a target price of ¥2,400 (potential Initiating at OUTPERFORM return 33.6%). Comsys Holdings generated approximately 60% of its orders and sales in with a ¥2,400 TP FY3/16 from NTT (9432), Japan’s largest domestic telecommunications carrier. Sector-relative valuation We use a sector-relative rating system. As outlined below, Comsys offers higher yields than other construction companies, and its valuations are likely to rise, in our view. Figure 1: Valuations of stocks in the construction sector under our coverage Housing, construction sector Target Share price (¥) Chg to EV/EBITDA P/E P/B Dividend yield Rating P/NAVPS price (¥) 8/15/2016 TP FY3/17 FY3/18 FY3/17 FY3/18 FY3/19 FY3/17 FY3/18 FY3/17 FY3/18 1721 Comsys Holdings 2,400 1,797 33.6% OUTPERFORM 5.3 4.8 11.3 10.5 9.8 1.0 0.9 2.5 2.7 1.04 1801 Taisei Corporation 990 809 22.4% OUTPERFORM 6.4 5.4 12.0 11.0 10.8 1.7 1.5 2.2 2.5 1.81 1802 Obayashi Corporation 1,300 981 32.5% NEUTRAL 6.6 6.2 10.0 9.9 9.8 1.2 1.1 1.9 2.0 1.21 1803 Shimizu Corporation 1,300 976 33.2% OUTPERFORM 7.5 6.7 11.1 10.3 9.5 1.4 1.3 1.8 2.0 1.45 1808 Haseko Corporation 1,200 1,039 15.5% NEUTRAL 2.7 2.2 5.5 5.7 5.7 1.3 1.1 1.9 1.9 1.69 1812 Kajima Corporation 700 739 -5.3% UNDERPERFORM 7.3 6.3 11.0 9.9 9.8 1.5 1.3 1.8 2.0 1.36 1893 Penta-Ocean Construction 690 580 19.0% OUTPERFORM 6.3 5.8 13.7 13.1 12.7 1.8 1.6 1.7 1.9 2.06 Source: Company data, Credit Suisse estimates OUTPERFORM rating reflects current stock undervaluation We offer a three-pronged rationale for assigning an OUTPERFORM rating to the stock: (1) Current share price does not we expect it to deliver attractive income growth, with a total yield in FY3/18 based on our reflect projected total yield earnings forecasts of 5.5% (dividend yield 2.7%, return from buybacks 2.9%); (2) projected or potential for relatively fast growth in OP is faster than other construction sector stocks that we cover; and (3) we also earnings growth see scope for improvement in gross margins over the next three years due to increasing demand for base station infrastructure for the rollout of new, faster networks (4G and 5G). The stock is only trading on a prospective P/E of 10.5x based on forecast FY3/18 earnings, at the bottom of the post-2008 range for this valuation multiple. We think the current share price reflects neither the high total yield nor the scope for future gross margin improvement. Comsys also appears undervalued relative to break-up value, with a P/B of less than 1.0x based on our FY3/18 forecasts. We see it outperforming the construction sector. Figure 2: Consolidated earnings summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated Mar-16 Actual 320,654 (2.4) 23,849 (13.8) 24,223 (13.9) 15,420 (8.0) 139.2 (4.9) Mar-17 CS E 342,700 6.9 25,700 7.8 26,100 7.7 17,100 10.9 159.0 14.2 CoE 340,000 6.0 25,000 4.8 25,500 5.3 16,000 3.8 144.5 3.8 Shikiho E 340,000 6.0 25,000 4.8 25,500 5.3 16,000 3.8 141.7 1.8 IBES E 340,500 6.2 25,300 6.1 - - 18,700 21.3 147.9 6.2 Mar-18 CS E 350,400 2.2 27,000 5.1 27,500 5.4 17,800 4.1 170.8 7.4 Shikiho E 345,000 1.5 26,500 6.0 27,000 5.9 16,800 5.0 148.8 5.0 IBES E 345,500 1.5 25,700 1.6 - - 18,950 1.3 152.2 2.9 Mar-19 CS E 351,600 0.3 28,100 4.1 28,600 4.0 18,500 3.9 183.3 7.3 IBES E 348,667 0.9 25,167 -2.1 - - 19,367 2.2 153.0 0.5 Source: Company data, Toyo Keizai "Shikiho" (Japan Company Handbook), I/B/E/S, Credit Suisse estimates Comsys Holdings (1721 / 1721 JP) 3 16 August 2016 Share price performance In absolute terms, the share price corrected between December 2000 and December 2002, Expecting stock to but rallied after that.

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